Corporates with global supply chains face a range of challenges in terms of efficiently managing processes and financial data flows. These are often further complicated by a lack of visibility along financial supply chains, resulting in occasional surprises that negatively impact performance and frustrate liquidity planning efforts. Indeed, many of the tasks and processes involved in trade transactions are handled by different departments – for example procurement, logistics and treasury – and banks habitually present their product offerings within institutionalised silos of cash management, trade finance and foreign exchange (FX).
A lack of automation and an over-reliance on the manual inputting and checking of processes – within a corporate and between trading partners – can be both a cause and an effect of this fragmentation. Of course, aside from the strategic issues that this situation presents, it will also often lead to additional costs and an increased susceptibility to human error – depriving a corporate of valuable resources that could otherwise be dedicated to core business activities.
Corporate and Bank Perspectives
From a treasurer’s perspective, the global visibility of liquidity is crucial to improving efficiency, yet many aspects of current operating environments are clearly a barrier to this. So how can banks and other service providers assist treasurers in this respect? Taking a more holistic approach to client needs and, more specifically, driving the convergence of cash management and trade finance is certainly a key factor in changing this landscape for the better.
At the most basic level, cash and trade convergence entails offering treasurers a single point of access to multiple, integrated solutions – covering areas such as cash and liquidity management, FX and trade risk mitigation. However, the product and solution set offered by banks should also reflect a more integrated – or converged – approach to treasurers’ needs.
In a recent survey of middle market US corporates carried out by Aite Group, 50% of respondents said that is was ‘extremely important’ that their bank could integrate trade finance and cash management via a single sign-on, while 27% cited it as being ‘very important’. This reflects the trend among middle and larger sized corporates towards seeking a consolidated view of accounts and improved straight-through processing (STP) to improve liquidity management. Indeed, this is an area where European banks and corporates are ahead of their US counterparts and where US banks can improve in the future.
By integrating the delivery of closely related services, banks may be able to afford their clients improved visibility along the length of financial supply chains, resulting in greater control and, therefore, more reliable risk management and profitability. In terms of managing liquidity – something that, since the recent financial crisis, is now at the top of many corporate agendas – this information will be much more readily available up the management chain to chief financial officer (CFO) level and beyond.
This integration of cash and trade not only benefits clients, but also the banks themselves. It delivers organisational synergies that reduce costs and leverage expertise to allow them to migrate towards a more client-focused standpoint, improving the quality of service delivery. Banks will therefore be more able to provide multiple integrated products to their clients, rather than merely one provider of products and services among many. Likewise, it would be impractical for banks to continue dividing aspects of their offering when, from the perspective of clients, they form part of a broader, integrated whole.
In this regard, cash and trade convergence offers a win-win situation for both banks and their corporate clients. Indeed, those financial institutions that neglect to react to this trend may find themselves left behind as their peers enhance their competitiveness and drive forward best-practice within the industry.
In providing financial services built around the needs of clients, banks need to continually respond to the changes in global trade. For example, the rising popularity of lowest-cost sourcing and the trend away from documentary risk mitigation requires that banks be nimble in responding with new solutions.
As a product of both the degree of demand from local corporates for more integrated services and the sophistication of the local banking markets, the level of cash and trade convergence across different markets currently shows a great deal of variation. However, no corporate or bank should be resigned to accepting disparate, inefficient and unconnected processes. Fortunately, while technology costs and the need to make large strategic investments may initially place certain aspects of convergence out of the reach of some smaller players, these costs will come down in time and best practice will inevitably spread through the industry.
Recent research (‘Strategies for Cash and Trade’ from Celent) shone a spotlight onto the situation in several different markets. In China, for example, a trend towards combining cash management and trade finance certainly exists but progress has so far been sluggish as “smaller banks do not have the capability and resources to integrate these two products”. Here, the smaller local and regional banks preferred by Chinese corporates do not have the capability to focus on the sophisticated IT infrastructure necessary for supporting convergence, while the overseas banks often lack the networks to reach out to these same corporates.
Looking at another nearby economy, India, the situation is somewhat similar. While trading on open account only emerged in India in the past decade, it has been seized upon by many as a cheaper and less complex way of doing business. Corporates are therefore looking to banks to provide them with integrated tools that can engage with both ends of a financial supply chain. However, while corporates are seeking out institutions with a large footprint, Celent observed that a bias towards localised banking remains and the resulting lack of emphasis on IT-driven integration is hindering some corporates in their efforts to benefit “from cost reductions and increased transparency through streamlined processes and reporting”.
In Germany the situation is, unsurprisingly, quite different. Celent’s research found that the majority of German respondents to their survey traded fully on open account – with a significant proportion doing so in connection with supply chain finance arrangements run by their bank – and that Germany is one of the world-leaders in terms of the integration of treasury services. However, the German market still has some way to go in terms of fully integrating cash and trade, a process that has been significantly slowed by the economic turbulence of the past several years. Yet both German corporates and banks expect the situation to return to normal quite rapidly and this remains a key market in terms of leading the integration of banks’ cash and trade offerings.
A Win-win Proposition
In summary, in order to react to changing corporate needs, banks must provide additional visibility over financial processes and flows by converging cash management and trade finance – taking the step from being passive providers of services and information to being dynamic participants in corporate financial supply chains. Rather than waiting for requests from clients for new products and capabilities, banks should use their market insight to proactively develop new solutions to give clients an edge against competitors.
This is something that is being driven by the increasingly complex global economic environment that corporate clients face. The changing nature of global trade, the movement away from mitigating risk through documentary means such as letters of credit, and a shifting regulatory backdrop are all contributing to corporates facing a more sophisticated landscape in terms of managing cash and trade. In this respect, corporates are right to expect providers to react to this changing picture by increasing the sophistication and integration of their own services, as well as how they are delivered. As Figure 1 illustrates, using technology for integration has the scope to encompass the broadest number of supply chain participants – including, for example, third-party logistics and global trade management providers – therefore promoting a more integrated and collaborative approach to enhancing supply chain efficiency.
To support clients, banks are thus seeking to enhance their transaction banking strategies, customer-centricity and the overall client experience when dealing with the financial supply chain. Removing inefficiencies and integrating financial information across the trade, cash management and FX business lines represents a significant opportunity for banks as those products currently driving bank revenues in the treasury services space – such as information reporting, online banking and working capital solutions – are also those that correlate with the present demand from corporates for more integrated solutions. And this is confirmation of the win-win situation for banks and corporates that the convergence of cash and trade provision promises.
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